PROBLEM 3A–5 Least-Squares Regression Analysis; Pricing Decision [LO4]                    

Tom Davis runs a guiding company, Chief Adventures, based in Squamish, British Columbia,

that takes customers on guided tours 12 months a year. During peak season, Davis employs up to 30 guides, all of whom are paid on an hourly basis at an average rate of $20 per hour. While there is some variation, tours are typically three hours in length. Chief Adventures has consid- erable fixed costs, including insurance, vehicle rentals, property taxes on its office building and warehouse, provincial licensing fees, utilities, wireless communications, administrative staff, and advertising. Each guided tour also results in variable costs, such as snacks for the customers, tour booklets, and other minor expenses. Other than the wages paid to guides, Tom has been recording all of these other fixed and variable costs as guiding expenses.

For planning purposes, Tom would like to be able to separate the variable and fixed com- ponents of guiding expenses. He thinks that the variable costs related to each guided tour are likely to be closely related to the number of customers served during a month. To begin the analysis Tom has compiled monthly data for 2014 below. Note: The guiding expenses exclude the hourly wages paid to guides.

 

  Month	Number of Customers	Guiding Expenses
January . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,500	$ 44,000
February. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,680	47,400
March . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,800	48,000
April . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .  .	2,520	51,400
May . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,700	53,600
June . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3,300	56,800
July . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	3,900	59,400
August. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4,500	61,600
September . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	4,200	60,000
October . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	2,700	54,600
November . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	1,860	49,600
December . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .	  3,900	   58,400
Total. . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . .   .	34,560	$644,800

 

 

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Required:

1.              Prepare a scattergram that plots the number of customers on the X-axis and guiding ex- penses on the Y-axis. What insights are revealed by your scattergram?

2.              Is it economically plausible for variable guiding expenses to be related to the number of customers? Explain.

3.              Use the least-squares regression method to estimate the fixed and variable components of guiding expenses.

4.              Assume that a small group of six tourists wants to go on a three-hour tour that will re- quire two guides. What is the minimum amount Chief Adventures can charge the group to cover the variable expenses of the tour?

(CMA, adapted)